A Labour election win could actually be great news for the pound

Stefan Wermuth / Reuters
LONDON — A Labour victory in Thursday's general election could actually end up being a major positive for the pound as the risk of a so-called "hard Brexit" diminishes, a new report from Pantheon Macroeconomics on Wednesday argues.

With voting in the UK's general election set to begin in less than 24 hours, the majority of pollsters and pundits are pointing to a Conservative Party win and a mildly increased majority for Prime Minister Theresa May.

Polls suggest that May's party holds a lead of around six points over Jeremy Corbyn's Labour, although outliers suggest that lead could be as big as 12 points, or as small as one point.

However, there is still a chance, albeit a slim one, that come Friday morning Corbyn could be set to become the UK's next prime minister, either as the head of a coalition, or — even less likely — after winning a majority in the House of Commons.

That's effectively down to the party's less harsh stance on Brexit than the Tories.

"A surprise Labour win likely would boost sterling this time — in contrast to past precedent — due to the party's softer Brexit stance. Labour's manifesto promises to enter negotiations '... with a strong emphasis on retaining the benefits of the Single Market and the Customs Union'," Pantheon's Chief UK Economist Samuel Tombs writes.

"The party also has not committed to any numerical immigration targets. As a result, we think that the U.K. likely would remain a member of the European Economic Area, thereby retaining full access to the single market, after it has left the EU in 2019."

Any outcome where Labour wins the most seats would push the pound up to $1.32 against the dollar overnight, Tombs argues. That would take it to a level not seen since September 2016.

"From an economic standpoint, membership of the EU and the EEA are virtually identical, so some of sterling's post-referendum depreciation would be unwarranted," Tombs continues.

"Sterling would not recover to its pre-referendum level of $1.45, given that interest rates have risen in the U.S. but fallen in Britain since then. Still, we think that sterling would jump to $1.32 overnight and that it would appreciate further over the following months as a soft Brexit became the most likely outcome."

The pound is little moved on Wednesday as Britain enters the final day of campaigning ahead of Thursday's general election. By 12.30 p.m. BST (7.30 a.m. ET) sterling is 0.05% higher against the dollar, as the chart below illustrates: